Mortgage Rates Jump to Highest Level Since 2002

I’d guess that it was a matter of kids’ schools that drove the Robbins’ decision. I have a co-worker who gave up life in SoHo around 10 years ago for life in “Yorkie” (as he calls it, in a joking attempt to make it sound cool) — for an easy commute for the kids’ school. I gotta remember to tell him to consider upgrading to the Robbins’ pad, although I fear it may be too south and much for him.

I would consider the place if I were 70, when proximity to medical services starts dominating my calculus — don’t want to commute to daily medical appts 30 minutes each way every day.

But I agree, the Robbins’ apartment was done up impeccably and represents hassle-free value for the right buyer. I can’t see it being assembled for anywhere near $30m.

Regarding 220 CPS, I find the neighborhood equally undesirable, but with apartments that are quite uninspiring. The Robbins’ apt vs this is like a joke:

https://streeteasy.com/building/220-central-park-south-new_york/39a

But lemmings will be lemmings, and this one seems surely on the path set by 15 CPW whereby it has a long slide after an initial silly run-up.

Nada,

220CPS has the central park views (agreed that the asking price is ridiculous) and proximity to Cargnegie hall and Lincoln center. Many fine dining restaurants around Columbus circle.

Schools are not close to 73rd and 1st. They are either York/86ths or West of Lex. Horace Mann/Riverdale may work from that address due to easy access to FDR. Restaurants barring a couple of good sushi restaurants are blah. He must have had reasons to pick that area. The number of people who would spend $20mm plus in that location are very limited.

I don't think Robbins is too concerned with getting his kids to school, I'm sure they're just chauffeured there. Ironically, I just heard his name dropped in a conversation at the golf course, people are very excited about this new ice rink coming to the neighborhood.

Ha. Indeed. Most ultra-wealthy people want what they want without caring about value when it comes to homes. Robbins still donates plenty.

How about starting a real estate advisory firm for the ultra wealthy? We use historical/ quantifiable data to steer them away from making foolish decisions regarding real estate and saving them millions of dollars which they can allocate for the the good of mankind? Maybe we price the service like a hedge fund, take 1% up front and then 10% of any profit on a future sale ; )

I dunno, what would you have told Rupert Murdoch or Larry Robbins to do in 2014? They were prices they were paying were comparable on a ppsf basis to other apartments in the same building, adjusted for elevation and (lacking) finishes. The price points on the lesser apts went all the way down to a “mere” couple million. So it’s not like they were overpaying in a relative sense. And it’s not like anyone is/was capable of developing these types of apartment for a lower price.

I was just having some fun. As I think you point out, other than maybe a bruised ego, these folks aren't sweating the losses on a home.

However, playing Monday morning quarterback, maybe a truly independent advisor could have pointed out they were buying in the midst of a raging bull market in real estate, and paying prices yet to be seen in New York City?

Perhaps. But I think people have their own priorities and notions of good financial ideas. I certainly provided my opinions and cold financial analyses about the NYC RE market here 10-15 year ago. I don’t think the audience were billionaires or people who had excess capital lying around. A dollar in NYC RE meant a dollar not invested elsewhere. What I heard back was, to me, a lot of faulty analyses that, after rigorous assessment, turned into “Well, because I wanna” or “Well, because I believe” and “No one can predict the future, may as well take the dive”.

So “independent advisor” seems like a tough gig.

We've definitely directly experienced better outcomes for the non-ultra wealthy sector, although certainly not in all cases even when comparing similar timelines. I think buying at the wrong time, coupled by a less than prime location has certainly been a recipe for poor results.

I think what really catches some New York City seller off Guard, is the lack of liquidity. Basically the inability to sell even when they're willing to take a significant loss.

I think it would be interesting to start a thread or add to this one with some trades that did work and try to understand why. And why others didn't.

220 CPS, 39A: $32m for one public room (the LR) and a long hallway? And 3 lot line windows (unlikely to be blocked, but still). Fine for the staff rumpus room, perhaps.

Meanwhile, nobody is buying old school ultra lux either: Ms. Wrightsman's apartment still sits on the market (was $50m, then $39m, and now Nada's $30m will be enough, with some change left over to start the reno - though Ken Griffin will be upset as he paid more for a higher floor. (Mrs W's unit includes a LR, DR, and library for public space, and a proper foyer, rather than a bowling alley, for making your entrance).

Look at what Ken's building on Palm Beach, it's hard to fathom? If I were a psychiatrist, I think I would call this "King syndrome". I think it's much more interesting observing how Warren Buffett spends his money. It's almost like he's a absolute purist of capitalism, he seems to be mostly in it for the game, that's the ultimate reward. I think there's something slightly crazy about building such a massive fortress for you and your wife. But I guess, whatever floats your boat.

https://robbreport.com/shelter/new-construction/ken-griffin-worlds-most-expensive-home-1235379095/

At least he pumping the money back into the economy!! Vs Buffet who never sells and pays much taxes.

At least he pumping his money back into the economy!! Vs Buffet who never sells and pays much taxes.

Guess that's one way to look at it. A lot of contractors and day laborers along with the staff that it takes to run the place...

Aaron2, you’re talking about this one, right?

https://streeteasy.com/building/820-5-avenue-new_york/3fl

Seems vastly more interesting than 220 CPS. Will they be satisfied with just the $30m, or do I need to start playing along by joining some social circuit first?

>> Higher for longer is the new mantra, but I think few are prepared for "longer" to be 3-5 years.

Yeah, I think that would catch many by surprise. I recall a conversation with a colleague in 2022, someone who should be more knowledgeable about this stuff than my random musings. I thought we had shifted into an era of higher rates to keep a lid on inflation, and he was like “Maybe, but nah, I think we’ll be back to ZIRP because the underlying trends are still there.” I doubt he’s still in the same place, but so many people think rate cuts are a foregone conclusion.

Who here thinks mortgages are going to move off the 7% range in the next few years? And if they are, in what direction — up or down?

I think rates will come down just because the powers that be will want/need them down. If Trump gets elected, I would double down on that bet that interest rates come down sooner than later.

Will the powers be responsing to tamed inflation, or will they just let inflation run rampant?

I think most politicians don't act in regards to what's best for the long-term structural health of the economy. I'm not talking about 2% rates, I'm thinking we get somewhere around 5%. Time will tell...

Nada, In my opinion, 10y will come down from current 4.7ish as the Fed cut rates. What is the new Fed fund average? Perhaps 2.50-3% range. In housing, we have a supply issue at the low/mid end where people want to live post covid movement. Fed higher rates are actually impeding supply and keeping rental prices high. So the historical wisdom of demand impact being more powerful than the supply impact of higher rates is being increasingly questioned.

The Fed is a layer removed from politics. Not 100%, of course. And totally changeable / abolishable with the simple agreement of the House, Senate, and President. (I’m holding my breath…)

Regardless, even if politics drove the decision… the number 1 concern of voters across all issues is inflation. Interest rates does not even rank:

https://www.statista.com/statistics/1362236/most-important-voter-issues-us/

I wonder if the 11% that said the economy, are including interest rates in that concern? Then again quite a few people have purchased homes with very cheap money. Mostly what I hear from the non one percenters down here in Florida, homes are just too expensive for them to purchase, they haven't even got to the interest rate issue yet.

If one was to be cynical about the politics of rates vs the politics of inflation, consider who is impacted by each and how they vote.

Inflation impacts everyone.

Interest rates don't impact existing homeowners, who skew older (boomers/genx/elder millennials).

Older people vote at much higher rates than the young.

So I think higher for longer (mortgages 6-7%) could go on a few years.
I don't expect 4% anytime soon.

An indicator of how much discretionary spending is still sloshing around is the travel industry...

>> Nada, In my opinion, 10y will come down from current 4.7ish as the Fed cut rates.

Based on what? We have an economy that is humming along just fine with rates at ~5% between 0 and 30 yrs. This has been the state of play for nearly 2 years now. Unemployment is quite low at 3.8%. Rates at 5% is historically very ho-hum. Maybe this is the new “normal”.

The large population bubble of boomers is of retirement age, and they sit on a lot of wealth (50% of total). The supply of labor they provide has been decreasing toward a trickle. Their demand, however, seems likely to be strong given the wealth.

And who’s replacing them? Gen Z, who by all accounts seem to have strong spending habits.

While I don’t disagree with the perverse affect rates have on housing supply, Fed rates are a demand-side tool. You can see that in the under-supply of new homes in the last decade, especially the first half, despite ZIRP.

"Based on what?"

Lag effect is still kicking in with mortgages being the biggest reason for the lag effect and excess savings at the low/mid income have been running out. Then we have labor supply at the low-end with recent illegal immigratns getting work permits.

On Gen Z demand, there’s a blurb I found interesting at the bottom of this article about Hudson Yards:

====

https://www.nytimes.com/2024/04/22/nyregion/hudson-yards-office-space.html?smid=nytcore-ios-share&referringSource=articleShare

Abby Whittier, 26, moved to a studio apartment on the 33rd floor of a luxury high-rise apartment building in Hudson Yards in summer 2022. She loved watching the boats glide up and down the Hudson River from her unit, she said, but she realized within a few months that the neighborhood was not for her. There were few affordable restaurants or nearby grocery stores.

“It definitely didn’t feel like quintessential New York City,” said Ms. Whittier, who left when her lease expired in 2023 and moved to Lower Manhattan. “Paying $3,500 to live in New York City and not being able to grab a slice of pizza next door, it was kind of crazy.”

====

One can look up the woman, her job, the pay of said job, etc. Basically, she is a software developer working for a company / team in NJ (Newark, I believe). Upon graduating at age 24 and taking a high-paying job, she chooses luxury housing in NYC that uses up 50% of her after-tax salary and 40% of her total comp. No measured step-up in spending from school, just straight to “spend the full monty”.

I’m not making a judgement about her choice here, but rather considering the implications. And this may be an isolated situation, but increasingly it seems like a generational shift in habits. If Gen Z is spending like this coming out of the gates, what’s to come in the upcoming decades as their spending power increases? And what does that imply for rates needed to control the balance of demand with supply?

>> I wonder if the 11% that said the economy, are including interest rates in that concern?

I considered that too, but the category is “jobs & the economy”. I think people picking that category probably meant jobs & pay.

That makes sense.

>> If one was to be cynical about the politics of rates vs the politics of inflation, consider who is impacted by each and how they vote.

Exactly. It might be even more skewed than that. Inflation affects older people more, because they are less likely to have salaries that grow with inflation. Higher rates may affect the value of their assets with some vague decade-long lag, but paying more for food today on a fixed income is visceral.

@nada: Yes, that's the one. To the other question, it may be up in the air: Mrs. W is no longer on the board, and per the articles about her (and the husband), was old-school conservative about who was an acceptable neighbor. That old guard has been slowly replaced with others who appear to be less uptight about who their neighbors are (at least in public -- perhaps they wouldn't actually want [insert name of your favorite appalling strawman] in their shared elevator).

The Palm Beach construction is another in a long line of trophy properties (old and new), and maybe that's his peacocking for a new wife (Keith: he's been divorced since 2015). But, since he's essentially uncontrollably wealthy, why not?

Perhaps it's just wishful thinking on my part, regarding 5% rates.... to loosen up the real estate market a little bit : ) But since this is just a friendly wager, I'm going to go with rates being closer to 5% in a year than 7%.

Thanks, Aaron2. Given the circumstances, I’ll add it to the long list of $30m apts I won’t buy ;).

>> But since this is just a friendly wager, I'm going to go with rates being closer to 5% in a year than 7%.

That’s roughly saying that you’d be willing to bet that 10yr rates a year from now are going to be 1% lower than today when the market trades that at 0%. So one could take your bet and hedge it with the market for a risk-free profit, however it turns out. But as a friend, I wouldn’t do that to you ;).

I do sometimes wonder about the amount of wishful thinking that goes on in the world…

Lol, and that's why they pay you the big money! And I just keep dollar cost averaging into the s&p...

>> Lag effect is still kicking in with mortgages being the biggest reason for the lag effect and excess savings at the low/mid income have been running out.

According to Fed governor Waller’s estimation, lag effect is likely over. See section starting at page labeled 3:

https://www.federalreserve.gov/newsevents/speech/files/waller20230713a.pdf

He says 12-24 months is the typical measured lag, with shocks in the policy change producing the response. The response has some immediate up-front effect, followed by follow-on effects that mete out slowly for a while to a maximal point (the “lag”), after which they fade.

A good measure of policy shocks (which includes likely future changes) is the 2yr rate. It’s been 18 months since the 2yr had its 4.x% increase. Furthermore, he says that there is evidence that big shocks such as the ones seen have shorter lags.

So perhaps lag effects are still present, but it sure doesn’t seem so based on his assessment of how the economics have worked in the past.

On the issue of lags from mortgage rates pushing their way into the economy, I have my doubts. Existing home sales are down some from their long-run average, but much of that could be the locked-in effect. Looking at new home sales (actual new supply), demand looks perfectly fine even with rates at 7%:

https://fred.stlouisfed.org/series/HSN1F

And if you want to talk about the lag from people spending less because their interest payments are higher, I imagine the effect from the mass of refis in 2020-2021 far outweighs the trickle of new mortgages in 2022-2024.

And of course, every dollar of interest that you pay is a dollar of interest someone else can spend. The true effect is on the change in the willingness to otherwise spend that dollar.

On excess savings, isn’t this basically just cash people have sitting in their bank accounts? The amounts in question (a trillion or so) are a drop in the bucket relative to asset increases over the past 4 years ($40 trillion of US household wealth). I imagine the wealth effect from that is stronger.

Hasn’t the “excess savings” long been depleted, BTW? I think people may attribute too much to it. For example, my “excess savings” used to be high because I’d park money in a bank account. Then, I depleted it real quick in 2022 by moving it into T-bill funds. And I don’t add to my “savings” from income anymore because I don’t like taking on credit risk to pay a -5% spread (call me crazy). But I assure you, what I actually consider savings (separate from investments) has not gone away.

From our experience in the current market, what we're experiencing is folks that either have a bias towards ownership over renting, for various reasons or believe home ownership will provide a more stable home for their family if they have a very long view are the only ones buying. So the buyer pool has really thinned out.

In Brooklyn we continue to see very strong demand for the most desirable homes, which have been brownstones in prime downtown neighborhoods. And also well priced two to three bedroom homes in the same neighborhoods, call it under 2.5. and forget about the 2 bedroom 1 baths that are around a thousand square feet, trading for under 1.3, those units are attracting 6 to 10 bids after the first open house, I listed a few of those in a previous post. However, this is a relatively small amount of transactions.

It was sort of unbelievable the effect that low interest rates had on real estate (duh). It basically seemed like anyone that had the down payment was purchasing a home. Let's just say I'm glad I'm debt free, and other than improving my home we have lived well below our means. Between all the changes that will be coming due to these commission lawsuits, sure they'll be slow, but the seed has been planted. And now the fact that it doesn't look like we will be getting rate cuts anytime soon, if you're an agent, you better buckle up it's going to be a bumpy ride!

Keith Burkhardt
The Burkhardt Group

Nada, Excess savings calcualtion a little more complex and imprecise.

https://www.federalreserve.gov/econres/notes/feds-notes/excess-savings-during-the-covid-19-pandemic-20221021.html

Inflation and excess savings relationship for what is worth.
https://fredblog.stlouisfed.org/2024/02/household-net-worth-excess-savings-and-inflation-in-the-post-pandemic-years/

The second link is an interesting metric, 300. Thanks for sharing.

Keith, how would you characterize those in the buyer pool who are MIA?

Keith>> From our experience in the current market, what we're experiencing is folks that either have a bias towards ownership over renting, for various reasons or believe home ownership will provide a more stable home for their family if they have a very long view are the only ones buying. So the buyer pool has really thinned out.

That's a good question, I think it's difficult to generalize. I would think some of these MIA buyers are people without a bias and are looking at this market and thinking, "prices haven't come down much, interest rates have tripled, uncertainty in the economy. Maybe I'll just stay put."

The collective consciousness of a very strong bull market seems to move the herd very efficiently. Pragmatism is nowhere to be found. The most recent such market was post covid, I think we did over 100 deals in 2021, that's insane.

yes

A Brief History of Fed’s Uneasy Peace With the White House https://www.wsj.com/articles/a-brief-history-of-the-feds-uneasy-peace-with-the-white-house-608dee30

>> The collective consciousness of a very strong bull market seems to move the herd very efficiently. Pragmatism is nowhere to be found. The most recent such market was post covid, I think we did over 100 deals in 2021, that's insane.

To me, a bull market has connotations of rapid price increases. While 2.x% Fed special mortgages induced a lot of activity, there wasn’t much price increase. Basically, the SE Index has it as regaining the ~8% lost to COVID (which seems to be mostly gone away again). The last bull market NYC saw ended in 2007, if you ask me.

>> A Brief History of Fed’s Uneasy Peace With the White House

That’d be a lotta fun. The Fed royally flubbed inflation in 2021, pissing off the entire population. I’m sure it’s gonna be political gold for whomever instigates a second round.

And for the long-term macro view of availability and population:

https://unchartedterritories.tomaspueyo.com/p/why-i-dont-invest-in-real-estate

Maybe I'm using the term bull to generally, should be strong sellers market. But certainly, 2007 really stands out, so much In fact, I quit working at a big firm and started the Burkhardt group to offer discounted rental commissions, as I took to position it was a better time to rent than buy. Only about a third of my business was sales back then, but I was selling apartments, and then 6 months later re-selling them for significantly more! That's when I thought this is not sustainable, I used it as an opportunity to carve out my own path in the real estate world, as I was also very unhappy working at traditional firms. After the crash of 2008, my rental clients started asking me to put something together as they wanted to purchase as prices had fallen sharply. And the rest is history : )

Thanks for the link, Aaron2. Quite a comprehensive yet concise post!

We shall see whether real (inflation-adjusted) prices revert globally as the trends end or reverse. This certainly seems to have been the case in NYC over the past 15-20 years. SE’s index of same home resales have been basically flat since the end of 2007. During that time, CPI has increased 50%, meaning a home values have dropped by a third. It’s probably worse if you account for the fact that those same-home resales include a healthy degree of improvement (renovations become nicer over time).

Real prices have not done well even after “the crash of 2008” when “prices had fallen sharply” — by a paltry 15%. Since the 2009/2010 lows, real prices have gone down a further 20%.

In fact, I don’t think there’s a single date in the 2005-2024 history of the SE index with higher real prices than today. Even Jan 2005’s level stands 22% lower than today.

Going back before 2005, the best price indicator of same home resales I can find is Miller Samuel’s charts of average coop prices going back to 1989. Unlike condos, it represents a fixed housing pool (no new dev built only to increasingly luxury or ultra luxury standards). And 2005-2024, it matches the SE index rather well.

https://millersamuel.com/files/2024/01/1Q24MHT-avgBYtype.jpg

The story there is flat 1989-1997, tripling 1997-2007, flat 2007-2024. I believe one has to go all the way back to 2000 to find a point where today’s real prices are flat. The best entry point was 1997, with current real prices being 50% higher.

It’s also fascinating that even 1989 prices, which were pretty much a peak, are up 10% in 2024 in real terms. (I imagine they’re more likely flat or slightly down once you account for improvements in finishes, etc.)

On the inflationary pressures of the bulge of retiring boomers, check out the 2nd & 3rd charts in this WSJ article from yesterday.

https://www.wsj.com/economy/housing/rising-stocks-home-prices-young-americans-left-behind-ae941b64?st=5yhcozpj57u77a5&reflink=article_copyURL_share

Yes, very interesting article. I especially enjoyed the comment section where the author is quite active, it's a good discussion. Love seeing a chart that goes back to 10,000 BCE!

Basically, 55+ sits on $115T of assets. That’s 70% of all age groups’ assets. The interesting part is that 20 years ago, the 55+ share was 50%.

The increasing asset share coincides with a period where low rates were necessary to boost demand to match plentiful supply. Presumably boomers in their peak work years were supplying labor and socking away money instead of spending enough of it to balance with supply. I think this trend has ended and will be reversing for the next couple of decades — boomers providing little labor supply but having money to maintain plenty of demand, more than their predecessors, producing inflationary pressures that require higher rates.

It is that need to spend for experiences in young people. Also, bigger student loans with increasing percentage of degrees in subjects which don’t pay. Will they be “saved” by their parents transferring wealth? I think that is happening anecdotally.

Nada, You long term effect on rates is very good analysis.

300, I imagine the transfer of wealth will be larger than by previous generations, if for no other reason than there being more dollars and people in that population bracket. Will it be more percentage-wise? I’m not sure. While I agree with you that there seems to be a lot of parental assistance in NYC, that’s how it’s felt ever since I’ve been here. I don’t have any context for it prior to that, so I cannot tell if it’s an NYC thing or a broader trend.

Nada,
It is certainly more in NYC than what I saw before in 90s. I remember that not that many of class-mates in my grad business school had wealthy parents. Comfortable but not rich with a few notable exceptions like Ferragamo's kids. When I started working in banking not that many kids with rich parents. It all changed starting late 2000. I have had several hard-working analysts and associates whose parents were certainly in $10mm plus asset brackets given the parents lifestyle and jobs/businesses. It is probably a reflection of wealth accumation in America by working rich and higher comp levels for that cohort.

Also, I want to add that certainl skills lend themselves to scalabily due to technology and American companies have been at a forefront in that. That is the real source of wealth accumation in working rich. In my view, that should put a damper on growth and eventually rates going up but that remains to be seen with all the continuing govt deficits and bond supply despite economic growth.

Thanks for sharing the 90’s => 2000’s experience. I do wonder whether that field jumped the shark, sorta like physicians in the decade or two prior, with society / parents driving kids into it as a “good” profession with assured riches. The earlier stories from Krolik and steve123 paint a financial picture not unlike what doctors went through.

One question on what you wrote. Why would wealth accumulation by that cohort put a damper on growth, and how does that relate to supply/demand imbalances driving inflation & rates?

High income folks just don’t spend as much as middle income leading to eventual slow down of economy in the absence of increased govt spending. In addition, the asset rich provide both debt and equity capital leading to lower cost of debt and equity capital.

Btw, I have seen some articles where the spending slows down significantly with age for people - possibly as they need smaller house, aren’t taking care of children and paying for their college, are living in cheaper locations, and just don’t need as much food and clothing. Of course, if they keep transferring wealth to their children and grand children, they may not spend any less.

“ Also, bigger student loans with increasing percentage of degrees in subjects which don’t pay. Will they be “saved” by their parents transferring wealth? I think that is happening anecdotally.”

No, they will be saved by our government which increasingly feels the need to “forgive” student debt (in an effort to bribe younger voters). No doubt young people are now expecting it and will be further encouraged to obtain useless college degrees. Universities must love this, more money for bloated administration. I just wonder when the government will feel the time is right to forgive my mortgage and car loan…

Thanks for explaining, 300.

My sense has been that boomers haven’t been downsizing as much as prior generations, FWIW.

The third graph on this page is interesting, as it shows the massive size of the boomer generation. They’re 60% bigger than the prior generation and 40% bigger than the subsequent one. The movement of this mass through ordinary stages of life in ordinary ways can produce very non-ordinary economic results.

https://www.pewresearch.org/short-reads/2020/04/28/millennials-overtake-baby-boomers-as-americas-largest-generation/

>> No, they will be saved by our government which increasingly feels the need to “forgive” student debt (in an effort to bribe younger voters).

I’m not a fan of forgiving student debt, but on the scale of the govt’s tendency to write big checks in an effort to “bribe” some subset of the population, the transfer of money from younger generations to older generations in the form of overdrawn Social Security and Medicare funds takes the cake.

Also, it is important to note that the amount of “saving” that is possible on student loan forgiveness is a mere $1.75T, relative to $114T of assets currently in the hands of 55+. I am guessing parents will be giving significantly more than the govt to “save” their kids.

Social Security isn't overdrawn yet.

Technically, it’ll never be overdrawn. The payments going out have just been too large relative to the payment that will come due. So “overspent” would have been a better word for me to use.

An article about the wealth effect blunting the effect of rates:

https://www.nytimes.com/2024/04/30/business/economy/high-fed-rates-rich-people.html?unlocked_article_code=1.oU0.3mD4.3Mov0iqiAt1j&smid=nytcore-ios-share&referringSource=articleShare

The article wasn’t terribly interesting, except for this vignette:

Katie Breslin, 39, has both benefited and suffered from rate policy in recent years. She and her sister bought a house in Manchester, Conn., when rates were near rock-bottom. But she is in graduate school and has both student loan and credit card debt, including one credit card with an interest rate that recently reset to 32 percent. This is leaving her with less disposable income each passing month, as more of her income goes to interest payments.

Paying the balance in full seems like a reach, and expenditures that seemed reasonable before, like an upcoming family trip to Ireland that she already paid for, feel like splurges.

“It just feels almost irresponsible to go on it now,” Ms. Breslin said of the trip. She used to order takeout weekly, but now she does so once a month, if that.

Nada, Thank you for the free NYT article. All they could find is a 39 year old student with credit card debt who is suffering.

At some point next year, next decade, next...

The bill comes due. The more overpriced Real Estate is the bigger the correction will be. My personal opinion is that right now NYC Real Estate is between 40% and 75% overpriced.

300, read this article and you will understand why interest rates will never go down again in your lifetime.

https://www.nytimes.com/2024/04/30/dining/tiktok-fyp-restaurant-recommendations.html?unlocked_article_code=1.ok0.9bV8.BCgZkvvamReS&smid=nytcore-ios-share&referringSource=articleShare

Thistle Swann and Jacob Cummings, who met on Hinge, put their faith in the internet once more to choose their anniversary dinner locale.

“I just looked up ‘fancy restaurants’ on TikTok,” Mr. Cummings said. “I don’t know anything about fancy culture, but I could tell by looking at the place that it was dummy fancy.”

That’s how the couple, both 25, found themselves below a huge fake tree sprouting from the middle of the dining room at Meduza Mediterrania, a clubstaurant in the meatpacking district with a strict dress code (no sweatpants, shorts or jerseys) and a pricey raw bar.

Meduza’s website calls it “a dining experience that takes you on a journey to a world of sunlit coasts, sparkling waters and vibrant culture.” I didn’t find any geographic marvels, but I was surprised to find the food (shiso tzatziki, lamb chops with chimichurri, wagyu kafta) terrific.

The couple agreed, though admittedly, they never go out for nice dinners — Mr. Cummings is unemployed, and Ms. Swann teaches ceramics and caters. “But,” Mr. Cummings said at the end of the meal, “I’m gonna be honest, it was not $800 delicious.”

Ha. Good one. I wonder where they got the money to pay for $800 dinner. How careless about money do you have to be not even to google the restaurant reviews and blow up $800 on a restaurant when the menu is in front of you!!

Tiktok giveth and tiktok taketh away. But mommy and daddy always there.

https://www.tiktok.com/@jacobcummings_

I don’t judge, I only extrapolate…

Here are the full set of guidelines for your next outing:

https://www.meduza33.com/know-before-you-go

30yrs, why a correction instead of more sideways (aka bleed it out slowly to carrying costs / inflation)?

BTW, the discrepancy between NYC and the rest of the country has been fascinating:

https://www.spglobal.com/spdji/en/indices/indicators/sp-corelogic-case-shiller-us-national-home-price-nsa-index

Basically, the last 10 years has been flat in NYC vs 2x nationwide.

Also note the 6.4% YoY increase in nationwide home prices. Housing is supposed to be a prime mechanism by which Fed policy works. Fed fund rates have increased from 0% to 5.25% and mortgage rates from 2.x% to 7%. After an initial reaction the first year, we are back to rapid increases and setting new peaks.

I get that Fed policy works with long and variable lags. But when you have a reaction after 12 months, and then a reversion the 12 months thereafter, it sure does give the impression of a new normal, don’t it?

Stated another way, Fed policy is trying to keep a lid on prices while maintaining jobs. Jobs have no issues. I get the argument that high rates drive high rents because the alternative of buying becomes costlier. But then what’s driving the *increase* in housing prices despite the higher rates?

The salient explanation is that there is too much demand for housing, alongside everything else. And while high rates could dampen supply in the long term under certain conditions, how can builders not remain incentivized to increase supply given increasing & peak prices? With home prices up 50% over the past 5 years against CPI (labor costs, etc.) “only” up 23%, build baby build. It’s not like 2019 was a bad year for builders.

Nada, A few things I can think/speculate about for housing supply remaining tight

- movement of people due to WFH and retirement post-covid
- existing inventory is trading below replacement value
- High rates (adds 10% easily to the cost) and long lead time to develop
- Slow down in building for a full year during covid
- Downsizing and moving to cheaper locations may not be happening due to locked in rates and wealth effect for 65+.

> Stated another way, Fed policy is trying to keep a lid on prices while maintaining jobs. Jobs have no issues. I get the argument that high rates drive high rents because the alternative of buying becomes costlier. But then what’s driving the *increase* in housing prices despite the higher rates?

Other than what 300_mercer said, I think the unemployment rate is still too low to control the inflation. In other words, Fed's interest rate of 5% is still too low to cool down the economy.

Low unemployment gives people money to spend: buying stocks, house, or expensive meals, which can partly explain the prices increase of stocks and house.

Will the Govt spending slow down if the fed raises rates to 6%? Basically Govt keeping adding what Fed is trying to take away.

inonada,
Because people are lemmings. They read an article about Real Estate prices going up and they buy anything no matter how bad the deal is. Then they read an article about prices going down and no one buys anything no matter how good a deal it is

300, regarding housing supply… new housing starts remains higher today than any point in the 2010’s:

https://fred.stlouisfed.org/series/HOUST

>> movement of people due to WFH and retirement post-covid
This is demand, not supply.

>> existing inventory is trading below replacement value
Given the degree to which prices have outpaced inflation, I am skeptical

>> High rates (adds 10% easily to the cost) and long lead time to develop
I agree that higher rates are a factor, but long lead times have always been there

>> Slow down in building for a full year during covid
This seems wrong — see the chart and the size of the blip.

>> Downsizing and moving to cheaper locations may not be happening due to locked in rates and wealth effect for 65+.
Again, I think you are conflating supply with demand. An existing home has already been supplied to the market. The desire by consumers to not relinquish said home when they otherwise have normally been inclined to do so represents demand. If people keep buying homes, never selling the old ones when they normally otherwise would have, that represents an increase in demand. They want more homes.

Stated another way, think about gold. Mining is the only way to increase supply. People’s inclination to hold vs sell already-bought gold is representing their net demand. A change in peoples’ inclination to sell their gold does not represent a change in the production of gold. If anything, an increase of people holding onto gold rather than selling (net demand) pushes prices up, which in turn tends to increase supply.

>> Other than what 300_mercer said, I think the unemployment rate is still too low to control the inflation. In other words, Fed's interest rate of 5% is still too low to cool down the economy.

I was thinking about this on the way home yesterday, before I read your post. We’ve been at below 4% unemployment for 2.5 years now, roughly when the current tightening cycle began. The unemployment has barely budged in response to a pretty rapid tightening. I haven’t looked up the details, but my gut is that is a historical outlier.

Job openings per unemployed is moving in the intended direction, but it still hovers lower than any point over the entire history of the stat going back to 2000:

https://fred.stlouisfed.org/graph/?g=p9aA

>> Will the Govt spending slow down if the fed raises rates to 6%? Basically Govt keeping adding what Fed is trying to take away.

The ensuing mess will be fun. We used to have one party intent on deficits and another party reigning it in. Somewhere between ZIRP and the dumbification of the other party, we now have two parties intent on unsustainable deficits.

I don’t see the govt’s realignment to ZIRP all that different than individuals’. The spending habits remain long after ZIRP ends, and only a durable period of paying high rates can shake them (collectively) of said spending habits.

30yrs>> Because people are lemmings. They read an article about Real Estate prices going up and they buy anything no matter how bad the deal is. Then they read an article about prices going down and no one buys anything no matter how good a deal it is

I don’t disagree, but factors in RE make it different. I think we’ve had this debate on NYC RE for 15 years now, with you saying a crash is the likely resolution and me saying “bleed it out” is the likely resolution. Thus far, it has been “bleed it out”. While a crash may happen yet, it is still the less likely outcome. But regardless, the path wouldn’t affect my decisions today.

As an example, I ran the numbers on a Village townhouse that sold in 2024 at basically the same price it was purchased in 2011 when it was “a good time to buy”. Using 2x leverage, the owners ended up losing 15% of their capital relative to rent (imputed for the 6 years they used it, actual for the 7 years they rented it out). On an inflation-adjusted basis, they ended up with 2/3rds of the money they started with.

That’s an OK outcome if you squint, I suppose. But stocks would have yielded a 6x better outcome and a 60/40 stock/bond blend a 4x better outcome. That’s how “bleed it out” works, slowly losing drip by drip while the alternatives thrive behemothly.

That's unfortunate regarding a townhouse bought in 2011 that sold in 2024 at the same price. Here's a listing that we recently closed on, we also assisted the seller with the original purchase. No renovations done other than some decorative. Curious how you would view this. This was a loft and flat iron.

DATE PRICE/EVENT
4/24/2024

$3,538,000

Sold by The Burkhardt Group

2/27/2024

$3,538,000

In contract

9/5/2023

$3,538,000

Price decreased 5%

5/31/2023

$3,725,000

Listed by The Burkhardt Group

2/15/2013

$2,595,000

Sold by Corcoran

1/31/2013

$2,500,000

Closing record
12/7/2012

$2,595,000

In contract

9/5/2012

$2,750,000

Listed by Corcoran

Keith,

That is very good return relative to the rest of Street Easy Manhattan index.

Purely from investment point of view ignoring the desire of many families to own and still have plenty of uninvested cash:

Manhattan real estate underperformance relative to the rest of the country ex San Fran and perhaps a couple of other areas post Covid and since 2015/6 is undeniable. Ultra-luxury ($10mm+ and high $ per sq ft) and stuffy coops have played a big part in my opinion. Prime BK is on fire realtive to Manhattan but I can find an index for that.

but I can't find an index for that.

I think for the individual buyer they need to really drill down on the particular neighborhood they're looking to purchase in.

I wonder how things look going forward for Manhattan real estate. There is slow drip, there is crash opinion here. Me thinks Covid flight is over and all the ambitious youngsters want to be in NYC or Silicon Valley and Manhattan development below certain streets seems to be dead. How it translates to prices indeed will be neighborhood specific as Keith says. I struggle with direction of the index as there will be pressure from new development resales. That said I am willing to make 1 year bet.

Nada. Name your percentage change.

I have a slow drip at my house, it's called Amazon.

@Keith :D
It's amazing how strong the urge is to own things, whether from Amazon or on the RE market. I admire those who can overcome it. Maybe ownership is an atavism. Today, your tastes and opinions weigh heavily as markers of membership in elite groups. Still, there is the small matter of finite rental contracts. :)
The consensus seems to be Manhattan RE is a big marshmallow test: the longer you wait, the better positioned you'll be before taking the plunge. Or at least there's no penalty provided markets don't crash. And in that scenario, rents and RE values will plummet too.

>> Curious how you would view this.

I view that as a smart / lucky purchase that appreciably outperformed the market, aided by a return-enhancing decision to use your rebates to save 3-4% in transaction costs. Over that period, the SE index was up 13%, and this resale was up 42%. So, an outlier. (FTR, the townhouse was also up a bit, but it had a degree of reno costs, and my “flat” declaration was figurative — it was up slightly.)

As to how this purchaser made out, I looked up the mortgage records and did some estimates. They started with 4x leverage, but that leverage reduced over time due to principal payments (and increasing market value w/o corresponding increases to leverage). Very roughly, interest+cc+insurance+upkeep offset imputed rent. So the question of financial benefit is what happened to the downpayment after paying transaction taxes, the brokers, and the cosmetic work. My estimate is a 1.8x return (ignoring cap gains on exit). On an inflation-adjusted basis, it’s 1.35x (or 2.7%/yr). So not a loss, but not particularly the sort of wealth compounding I’d look for over 11 years.

For comparison, S&P index funds did 4.1x over the period nominally, or 3.1x inflation-adjusted. A tripling of wealth rather than just increasing it by a third.

And if you allow for an outlier — similar to how that apartment represents a ~3x higher return than the index — AAPL did 13.2x over the 11 years, or 9.9x inflation-adjusted. You might say “Well, that’s an actual transaction I conducted in 2013”, to which I’d say “Yeah, well I was on this very board right in 2013 suggesting AAPL as an obviously better alternative than Manhattan RE”. At that point, 40% of AAPL’s price was its cash, and its annual profits over the past ~5 years amounted to a P/E of 6 on the remaining 60%. I recall making the analogy of “A 10% cap rate with above-inflation growth prospects, but then there’s also 40% of purchase price sitting in cash if you pull open the floorboards!” That scoundrel w67thstreet took up my suggestion and has yet to buy me a dinner!

Was that a riskier investment than 4x levered Manhattan RE? In some strict sense, I suppose so, to a degree. But given the financials, combined with the obvious ceaseless tapping of screens at the time, it seemed less risky to me than placing hope on a 3% cap rate with growth constrained by inflation, all financed with 4x leverage at 3.5%.

But whatever. If your client was happy with their home and outcome, and you’re happy about it too, I’m happy for both of you. At least you got your commissions, the 2/3rds you didn’t rebate. I didn’t even get dinner!